Investors who believe that smaller tech names can begin to pull their weight can utilize an equal-weight Nasdaq-100 exchange traded fund to capture potential growth opportunities of more mid-sized companies.
For instance, the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEArca: QQQE) and First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGS: QQEW) take an equally-weighted approach to the popular Powershares QQQ (NasdaqGM: QQQ), which tracks a cap-weighted Nasdaq-100 index.
As the appellation suggests, each of QQQE and QQEW’s underlying holdings make up more or less 1% of the overall portfolios. Consequently, due to the weighting methodology, the two ETFs include a much larger tilt toward mid-sized companies.
Specifically, QQQE’s market capitalization weights include mega-caps 17.5%, large-caps 46.6% and mid-caps 35.9%. QQEW’s weights include mega-caps 17.3%, large-caps 46.6% and mid-caps 36.2%. In contrast, QQQ’s holdings include 59.2% mega-caps, 31.1% large-caps and 9.7% mid-caps.
Due to the equally weighted methodology, QQQE and QQEW, with their greater focus on smaller and more nimble companies, could outperform mega-cap stocks during bull markets, but investors will have to be comfortable with potentially greater risks.
The equal-weight ETFs also show a slightly smaller focus on technology names and a greater tilt toward other sectors, compared to QQQ. For instance, QQQE and QQEW have a 41.0% and 41.6% position, respectively, in technology whereas QQQ shows a 56.2% weight in tech. Meanwhile, QQQE and QQEW include about a 2% to 5% larger focus on other sectors, including consumer discretionary, telecom, industrials, consumer staples and healthcare.